Saturday 7 February 2009

UK: FSA proposes introduction of a general short selling disclosure requirement

The Financial Services Authority has published a discussion paper in which it proposes the introduction of a short selling disclosure requirement for all UK listed shares. This would be wider in scope that the current disclosure regime which applies only to certain financial stocks

In its discussion paper, which provides a good overview of short-selling practices, the FSA reasserts the so-called market failure thesis by stating that regulation is justified "on the basis of identified market failures and if it is expected to deliver net benefits to the market" (para. 3.1). The FSA notes the controversial nature of short selling but nevertheless restates its position that short selling is a legitimate investment technique in normal market conditions. Empirical evidence is provided which, in the FSA's view, "tends to confirm, with some qualifications, the theoretical proposition that short selling allows negative expectations about share price developments to feed more directly into the actual share price and thus contributes to efficient pricing" (Annex 1, p3). 

The principal justifications offered in support of public disclosure are: [1] it has the potential to restrain what the FSA calls "aggressive large-scale short selling" which can lead to disorderly markets; [2] it can further enhance the informational efficiency of the market. 

For further information see:
Press release | Newsletter | Discussion paper | Online response form | Short selling instruments and related material

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